Boxer Wins a Round

By Robert M. Sussman and Ken Berlin
Posted on May 23, 2008, 9:00 am

Sen. Barbara Boxer (D-CA) this week circulated a revised version of the Lieberman-Warner Climate Security Act that contains a new framework for accelerating deployment of the advanced energy technologies that will be essential to achieve substantial reductions in US greenhouse gas emissions. This new framework is complex and requires careful analysis, but an initial review suggests it contains important improvements in the Act’s incentives and rewards for low-carbon energy sources.

Boxer’s so-called Substitute replaces the original bill (S.2191) proposed by Sens. Joseph Lieberman (I-CT) and John Warner (R-VA). That bill was reported out of the Senate Environment and Public Works Committee on December 5, 2007. Sen. Boxer’s Substitute will be taken up by the full Senate next month, on June 2.

The Boxer Substitute recognizes that the allocation and auctioning of greenhouse gas emission allowances are powerful tools for steering investment in advanced clean energy technologies. The Substitute uses these tools to encourage three low-carbon power production technologies: renewable energy, fossil-fuel plants with carbon capture and sequestration, or CCS capabilities, and nuclear power generation. In brief, the Substitute would accomplish the following:

Four percent of emission allowances would be set aside from 2012 to 2030 for distribution to owners, operators, and developers of renewable energy facilities, including those which deploy solar, wind, geothermal, hydro, and biomass. After 2030, this set aside would drop to one percent of emission allowances. The bill sponsors estimate that these allowances will be worth $150 billion through 2050.

Four percent of allowances would be dedicated to accelerating CCS technology deployment at coal-fired power plants and other facilities. This program would have two components. First, through 2025, the revenues from auctioning one percent of allowances would be placed in a Carbon Capture and Sequestration Technology Fund to kickstart early deployment of CCS technology at five to 10 commercial coal-fired power plants. The bill sponsors estimate that these funds would total $15.7 billion. Second, three percent of allowances between 2012 and 2025 (increasing to four percent through 2030 and then decreasing to one percent through 2050) would be used to distribute "bonus allowances" to new and existing power plants and industrial facilities that capture and sequester their CO2 emissions.

A Low and Zero-Carbon Electricity Technology Fund would be established using revenues from auctioning 1.75 percent of allowances from 2012 through 2021, two percent from 2021 to 2030, and one percent through 2050. The Fund would be used for a competitive bidding (or "reverse auction") program among domestic producers of new zero- or low-carbon energy generation and manufacturers and suppliers of zero- or low-carbon generation technology. Funding for this program is projected to be $92 billion through 2050. Nuclear, renewables, and perhaps advanced coal generation technologies would be eligible to participate in this program.

Advanced energy research would be funded by setting aside the revenues from auctioning 0.25 percent of allowances through 2050. These funds, estimated to total $17 billion, would be made available to the Department of Energy through the annual appropriations process.

There is certainly room to debate the relative emphasis that these programs place on different low-carbon generation technologies. But Sen. Boxer and her colleagues deserve credit for recognizing the high level of financial support that advanced energy technologies will need to rapidly penetrate the economy, and for allocating these dollars among competing technologies in a transparent and balanced manner.

In particular, the parity of resources devoted to renewables and CCS (four percent of total allowances in both cases) is a positive step that reflects the importance of both renewable and low-carbon coal generation in shrinking the emission footprint of the power production sector. By contrast, the original Committee bill would have provided much less support for renewables.

The Boxer Substitute improves the incentive structure for CCS in two major ways: first, by distributing bonus allowances over a larger universe of plant developers and reducing unnecessary windfalls for individual plants; and second, by targeting auction revenue toward an expedited program of commercial-scale demonstration projects, which are vitally needed in the early years of the cap-and-trade program to create a sound foundation for widespread CCS deployment.

We have previously faulted the CCS incentive provisions in the version of S. 2191 reported out of Committee on two grounds. First, we demonstrated that as designed the bonus allowance program would provide large windfalls to developers of new plants with CCS well above the actual incremental costs of building and operating these plants, while only supporting the construction of a relatively small number of such plants.

Second, we showed that, on top of the bonus allowance program, the original bill would make available a substantial portion of the auction revenues for subsidies for CCS deployment, totaling as much as $238 billion through 2030. The two CCS programs – bonus allowances and subsidies from auction revenues – would have had a combined value to the coal generation sector of $348 billion using the allowance price projections in the EPA economic analysis of the original Lieberman-Warner legislation.

These concerns have been addressed to a large extent in the Substitute offered by Sen. Boxer. The Substitute significantly reduces the bonus allowance rate – the number of free allowances awarded for each ton of CO2 sequestered. In the Committee bill, that rate would have started at 4.5 in 2012, declined to 3.6 in 2020, 2.1 in 2025, and then dropped to 0.9 in 2030. In the Substitute, the bonus allowance rates for these years are 2.0, 1.7, 1.0, and 0.5, respectively.

The bottom line: Per-plant subsidies are over 50 percent lower over the life of the program. This would mean nearly twice as many plants with CCS would receive bonus allowances. Our analysis of the Committee bill calculated that only 48 gigawatts of coal capacity would receive bonus allowances through 2030. The Substitute would provide sufficient bonus allowances to subsidize 80-100 GW of coal-generating capacity over the same period.

The Substitute also more precisely targets auction revenues for CCS deployment. These revenues, projected to be $15.7 billion, would be front-loaded to support early-stage CCS demonstration projects at commercial scale. All experts agree that a representative mix of these projects, using a range of coal types, CCS technologies, and geological conditions, is necessary to provide a body of data that will build confidence in the viability of CCS and inform technology choices, site selections, and cost projections.

With the unfortunate decision of the Bush administration to cancel the FutureGen project, our progress in demonstrating CCS has taken a big step backward. The Substitute would successfully fill this void.

Moreover, by dedicating auction proceeds to a limited set of demonstration projects, the Boxer Substitute frees up funding for important public purposes, including transition assistance to workers and coal dependent states, and tax relief for energy consumers, which were insufficiently recognized in the original Committee bill. These programs are funded at significantly higher levels in the Substitute, which will go far to minimize dislocation and hardship from the new bill’s cap-and-trade program.

Despite these improvements, questions remain about whether the new bill reflects the optimum approach to accelerating deployment of CCS. We argued that the best approach to promote rapid CCS deployment is an emission performance standard that requires all new coal plants to limit emissions to levels achievable through the best performing available CCS technology. Such a standard would close the door on construction of uncontrolled coal plants, whose emissions could over time add to the U.S. carbon footprint, making the deep reductions necessary to stabilize atmospheric CO2 concentrations more costly and challenging to achieve.

Without an emission performance standard, a subsidy program inevitably must pay a "premium" to persuade reluctant plant developers to choose CCS over more conventional and less risky generation technologies. The Substitute reduces the size of this premium, but the bonus allowances would still appear to be worth substantially more than the actual incremental costs of constructing and operating a CCS plant as compared to a conventional coal plant purchasing allowances to cover its emissions.

Our analysis, for example, projects that the incremental costs of 150 GW of new coal capacity through 2030 would be only $28.7 billion, or well below the cost of the revamped bonus allowance program (which appears at first glance to be around $60 to 80 billion over that same period for approximately 80-100 GW of new capacity). Whether the smaller “premium” in the revamped bonus allowance program is adequate to motivate developers to choose CCS over conventional coal technology in the absence of a performance standard is hard to predict.

The emission performance standard eliminates the need to pay a premium since there is no longer an option to build uncontrolled coal plants. With a smaller subsidy per plant, there would be more incentive dollars available not only for new coal plants but for retrofits of existing plants as well as carbon capture at other industrial facilities, such as oil refineries and chemical plants. (These other facilities will ultimately need some financial assistance to obtain the benefits of CCS and would be eligible for bonus allowances under the Substitute).

We prefer to provide subsidies directly from auction revenues rather than in the form of bonus allowances. The actual value of bonus allowances will depend on the prevailing allowance price at any given point in time, creating uncertainty about the size of the revenue stream that plant developers will receive and complicating investment decisions.

By contrast, subsidies using auction revenues can be calibrated to the exact amount of the cost differential between CCS and non-CCS coal plants, eliminating the risk that they will be overly or insufficiently generous. Bonus allowances can also be used to offset emissions at existing coal plants, a problem that doesn’t exist under the direct subsidy approach.

One easy fix would be to preserve the amount of the current bonus allowance set aside but instead provide that these allowances will be auctioned and the revenues will then be used for direct subsidies to CCS plants on an incremental cost basis.

There also remain questions about how CCS would fit into the new Low and Zero-Carbon Electricity Fund and what role this Fund would play that will not be adequately performed by the bonus allowance programs for CCS and renewables. At first glance, the Fund seems duplicative of these other programs.

On balance, though, the technology incentive provisions of the Boxer Substitute are welcome and positive steps, providing a good starting point for the ongoing dialogue over the most cost-effective approach for accelerating deployment of CCS along with other essential low-emitting energy technologies.

Robert Sussman is a Senior Fellow at the Center for American Progress. To read more of his analysis and policy recommendations, please see the Energy & Environment page of our website. Ken Berlin is a partner at the law firm Skadden, Arps, Slate, Meagher and Flom.